Solved by verified expert :Essay Questions
44. Iona Corporation is in the process of preparing
its financial statements for the first quarter of 2009 and has asked your
advice as to how to report several items. These items include the following
events which took place during the first quarter of 2009 (assume all amounts
are material):
1) Iona redeemed bonds with a carrying value of $4,000,000 at a cost of
$3,760,000. This early extinguishment occurred because Iona wants to issue new
debt at lower interest rates.
2) Iona uses the LIFO method for its inventories. On January 1, 2009,
inventories amounted to $10,000,000, while, on March 31, 2009, inventories
totaled $9,200,000. Iona expects to replace the liquidated inventory at the
beginning of the second quarter at a cost of $1,000,000.
3) Iona changed its depreciation method on $4,000,000 of its delivery trucks
from the declining balance method to the straight-line method. On January 1,
2009, accumulated depreciation under the declining balance method was
$2,800,000. Had the straight-line method been used, accumulated depreciation on
January 1, 2009, would have been $2,300,000. The remaining life of the trucks
is two years.
4) Iona pays its top executives a bonus at year-end of 6 percent of operating
income before bonus and income taxes. Operating income before bonus and income
taxes for the three months ended March 31, 2009, was $10,000,000. Iona
estimates that its yearly operating income before bonus and income taxes will
be $60,000,000.
5) Iona closes its manufacturing operations in July of each year in order to
make its major annual repairs. Iona estimates that the cost of these repairs in
2009 will be $1,000,000.
Required:
For each of the events numbered 1 through 5, indicate how that event should be
reported on Iona’s income statement for the three months ended March 31, 2009,
and the balance sheet accounts effects at March 31, 2009. Ignore income
taxes.
